Documentation and methodology

Complete details on the data used to compute CEO compensation trends and the CEO-to-worker compensation ratio can be found in Mishel and Sabadish (2012), Methodology for Measuring CEO Compensation and the Ratio of CEO-to-Worker Compensation at http://www.epi.org/publication/wp293-ceo-to-worker-pay-methodology. We use executive compensation data from the ExecuComp database of Compustat, a division of Standard & Poor’s. The ExecuComp database contains data on many forms of compensation for the top five executives at publicly traded U.S. companies in the S&P 1500 Index for 1992–2010. We employ two definitions of annual CEO compensation based on different ways of measuring option awards. “Realized direct compensation,” referred to as “Options realized” in the table, is the sum of salary, bonus, restricted stock grants, options exercised, and long-term incentive payouts. It follows the definition of compensation used in previous editions of The State of Working America, which in turn adapted this definition from the Wall Street Journal (WSJ) annual report on CEO compensation (compensation reported by the WSJ has been compiled by various companies over the years, including Pearl Meyer, the Mercer Group, and the Hay Group and is the longest CEO pay series available to us). “Total direct compensation” (also a definition used in the WSJ series and labeled “Options granted” in the table) is the sum of salary, bonus, restricted stock grants, options granted (Compustat Black Scholes value), and long-term incentive payouts.

We define a CEO as an executive labeled a CEO by the variable CEOANN. Note that the executive flagged as the CEO may not necessarily be the highest-paid executive at the company. The CEOs included in our series are CEOs at the top 350 firms based on sales each year for 1992–2010.

Because no data for the compensation of an average worker in a firm exist, we create a proxy: the hourly compensation of a “typical” worker in a firm’s key industry. The wage measure is the production/nonsupervisory worker hourly earnings in that industry, the same series used in Table 4.3 for the entire private sector. We obtain compensation by multiplying the compensation wage ratio computed from NIPA Tables 6.3C and 6.3D. The hourly wages of production and nonsupervisory employees in 2011 were $19.47, 21 percent higher than the median hourly wage, so our proxy severely overstates the compensation of a typical worker and understates the CEO-to-worker pay ratio.

We use the growth in CEO compensation in the WSJ series to extend the CEO compensation series and the CEO-to-worker compensation ratio series backward. The WSJ series conducted by Pearl Meyer covered the years 1965, 1968, 1973, 1978, 1989, and 1992. We convert the compensation series to constant dollars using the CPI-U-RS and calculate the ratio of CEO compensation in each year as a fraction of the 1992 CEO compensation level. We then apply these ratios to the CEO compensation for 1992 calculated from the ExecuComp data. This moves the series backward in time so that the growth of CEO pay is the same as in the Pearl Meyer/WSJ series but is benchmarked to the levels in the ExecuComp series.

We make a similar set of computations to obtain a historical series for the CEO-to-worker compensation ratio. We start with the Pearl Meyer/WSJ series in constant dollars and divide it by an estimate of private-sector annual compensation of production/nonsupervisory workers in the same year. The compensation series is the real hourly compensation series presented in Figure 4B multiplied by 2,080 hours.